23 January 2014
As the economy and the hotel industry fundamentals continue to improve, hotel values have recovered to pre-recession levels in many of the top 35 hotel markets, the number of hotel transactions has jumped and new capital is pouring into hotels. This new capital — whether focused on new, ground-up development, or the purchase of neglected assets with a view to deep renovation and rebranding — is increasingly seeking new brands and management for their hotels. We have not seen this many people looking for a great operator and a fair hotel management agreement in many years!
Veteran hotel owners and developers know that all this good news needs to be tempered with some cold realism about the process they are about to undertake. They know that finding a great operator and negotiating a hotel management agreement they can live with is critical to the success of their investment and the value of their hotel.
In light of the many biased articles about hotel management agreements being written by operators (or by advisors to operators), my partner Bob Braun felt it was time to challenge all the “hay that has gone through the horse” and is being spread around.
The HMA Handbook and the Hotel Law Blog provide important information on this topic. For a more detailed discussion of relevant issues, we suggest you look at the links at the end of this article.
Let’s Clear the Air about
Hotel Management Agreements
Robert E. Braun | Senior Member, Global Hospitality Group®
Over the past several months, a lot has been written about what hotel management agreements should or should not say. The Global Hospitality Group® at Jeffer Mangels Butler & Mitchell has been drafting and negotiating hotel managements for well more than twenty years. Our experience extends to virtually every brand and every significant independent manager, as well as many less well-known players. Based on that experience, we thought it would be helpful to “set the record straight” on some key issues that owners need to consider.
1. Owners and Managers are not partners. One of the common statements we hear from owners and managers is that the management agreement “aligns the interests” of the owner and the manager, and that the manager is “just like a partner” in the hotel. While the interests of the owner and manager can be reconciled, they are not aligned — even when the operator makes an equity investment in the hotel. Managers, particularly brand managers, are focused on increasing the value of the brand they represent, while hotel owners are concerned about the value and income of a single property. Managers can “sacrifice” the profitability of a single property so long as the value of their portfolio is enhanced, and they get their money “off the top” from gross revenues, whether or not the hotel is profitable. Owners expect to profit from each property.
2. Managers are NOT taking ownership risk. While it’s true that hotel managers take on some costs and risk in managing a property, the fact is that in almost all cases, their risk is dwarfed by the owner’s risk. Owners are responsible for funding all of the costs of the hotel, regardless of its profitability; managers are not. Those who raise funds for charities often refer to the difference between “involvement” and “commitment.” And they like to make an analogy to a ham and egg breakfast, where they say the chicken was involved, but the pig was committed. In the world of hotels, managers are “involved,” but owners are “committed.”
3. The Hotel Management Agreement is important. Many commentators, including those with experience in the industry, argue that the manager’s track record is more important than the management agreement. We agree that an owner should verify the manager’s track record before making a commitment. However, the track record alone is not enough. First, while every management company has a list of highly touted successes, every management company also has a less-publicized list of disappointments – the track record goes both ways. Beyond that, a hotel management agreement is a complex document that identifies the expectations of parties for a period of five, ten, twenty, fifty years or more. Over that period of time, a good track record can turn into a disappointment, and relying on decades-old assumptions may be disastrous.
4. Owners need meaningful approval rights. All of these factors lead to a key conclusion – owners need to have a meaningful say in hotel operations. While owners hire managers to operate properties because of their expertise, resources, personnel and reputation, the relationship between owners and operators is “asymmetrical,” and the goals of the two differ. While managers like the idea of a 70’s style management agreement, where the owner simply hands the keys to the manager and hopes for the best, today’s owners are, and should be, vitally interested in operations. This means that owners should have clear oversight and approval rights over budgeting, expenditures and key operating decisions. They should not be dissuaded from exercising those rights because of an operator’s track record.
5. The gap can be bridged. Despite the differences between owners and managers, the gap can be bridged, but to do so requires expertise and experience in the options and alternatives available to the parties. From the owner’s point of view, an attorney that understands what managers need and how their requirements can be met, is essential. Just as important is bringing to the table advisors that can recommend meaningful and practical compromises, and who are known to be credible players in the industry.
Robert Braun is a senior member of the Global Hospitality Group® at JMBM. Mr. Braun advises hospitality clients with respect to hotel management agreements, franchise agreements and operating issues. He also advises on transactional matters, including entity formation, financing, and joint ventures, and works with companies on their data technology, privacy and security matters. These include software licensing, cloud computing, e-commerce, data processing and outsourcing agreements for the hospitality industry. He is a member of the International Association of Privacy Professionals. Contact him at 310.785.5331 or email@example.com.
For more information on hotel management agreements
You will find a lot more information related to this topic on the Hotel Law Blog under the topic Hotel Management Agreements and many will also want to look at Hotel Franchise & License Agreements
The following are only a few of the resources you will find there:
The HMA Handbook (2nd edition), Hotel Management Agreements for Owners, Developers, Investors & Lenders
Checklist for negotiating Hotel Management Agreements/Hotel Operating Agreements – The HMA PRO™ Checklist
Hotel Lawyer with insights on “How to get a great hotel operator”
The 5 questions every owner should ask before selecting a hotel brand
This is Jim Butler, author of www.HotelLawBlog.com and hotel lawyer, signing off. We’ve done more than $87 billion of hotel transactions and have developed innovative solutions to unlock value from hotels. Who’s your hotel lawyer?
Our Perspective. We represent hotel owners, developers and investors. We have helped our clients find business and legal solutions for more than $87 billion of hotel transactions, involving more than 3,900 properties all over the world. For more information, please contact Jim Butler at firstname.lastname@example.org or +1 (310) 201-3526.
Jim Butler is a founding partner of JMBM, and Chairman of its Global Hospitality Group® and Chinese Investment Group®. Jim is one of the top hospitality attorneys in the world. GOOGLE “hotel lawyer” and you will see why.
Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them.